Bank of America may need $34 billion in new capital

The news reports about the "stress test" results for Bank of America (BAC) are not consistent, but most say that the firm will be asked to raise $30 billion to $35 billion in new capital. [Update: most media outlets now report $34 billion.]

The bank may sell its stake in China Construction Bank for as much as $8 billion, but the balance of the infusion will have to come from private sources unless B of A wants to face a much larger investment from the government. The bank could also convert the government's preferred shares into common stock, but the net effect is that the firm might lose its independence.

Bank of America has a market cap of $69 billion, so current investors could face massive dilution. That fact should cause a major sell-off in the firm's stock.

According to The Wall Street Journal, B of A may get some special treatment from the government. The paper reports that "The bank's troublesome acquisitions of Merrill and mortgage lender Countrywide Financial Corp. likely saved the government from expensive and messy cleanups that could have exacerbated the financial crisis last year." But, how the "favorable" view of B of A would translate into an improved deal to raise money is not clear.

The news has already brought back the question of whether Ken Lewis can keep his job as B of A's CEO. That may turn on whether the government feels that it owes him something for staying the course on the Merrill Lynch deal.

Douglas A. McIntyre is an editor at 24/7 Wall St.


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